Author: A.T.

What a week it has been around my household.

Have you been to PlanetRx.com? Right now you get three items of your choice, worth about $15, free.

This largesse is fall-out from the Internet wars.

Internet companies, as you know, vie to see who can lose the most money, as huge gains in sales and losses tend to drive up stock prices. Right now PlanetRx is vying with drugstore.com, part-owned by Amazon.com.

Drugstore.com is offering $15 off (at least it offered it to me) and 3-items-for-a-penny.

(Both offer free shipping with orders of modest size. Not to mention the convenience of not having to leave the house.)

I had heard good things about PlanetRx but hadn’t actually used it until I went to find athletic supporters. To do that, I typed goto.com (on my browser, and probably yours, you don’t even have to type “www”). Then, in GoTo’s search box, I typed “athletic supporters” (using the quotation marks to tell GoTo I was seeking that actual phrase). Up came a bunch of sites, the first two of which were dead on. Shopinprivate.com (“We carry all sorts of items that are embarrassing to buy in a store or pharmacy”) had jocks for $8.50. Over-the-counter.com (“Never be embarassed at the checkout again!”) turned out to feed into PlanetRx.com, which offered precisely the same brand for $6.99. I bought five.

Free shipping — and three other free items that I could choose from a reasonably interesting list.

Earlier in the week, at drugstore.com, I had gotten my 3-items-for-a-penny-each plus $15 off a bunch of containers of Coppertone mosquito-repelling sun tan lotion.

I am now ready to play tennis in any mosquito-infested swamp.

Netgrocer.com, meanwhile, was offering for free:

3 Cans of Spaghetti-Os
1 Box of Honey Crunch Corn Flakes
1 Box of Regular Corn Flakes
2 5-Packs of Bic Disposable Razors
4 Packages of Kool Aid Pink Lemonade Mix
1 Package of 15 Solo Plates

Estimated value: $15.69.

The offer may have expired by now and, in any case, you had to buy $25 of other stuff of your choosing and admit you liked Spaghetti-Os. (Last time I ordered from netgrocer, I got a free jar of olive oil without even asking for it.)

I’m not saying I have saved enough on these deals this week to make up for the money I’ve lost shorting Amazon. But I probably saved $40 in real cash money. You should, too!

Last week I wrote: “What an awful lot of people have developed a taste for is neither investing nor sophisticated speculation but gambling.”

A friend writes:

“Some readers, including me, might find it useful for you to elaborate on the difference. For example: After hearing that NATO was running out of cruise missiles in the Kosovo war, and reasoning that this type of war is likely to occur again in the future, I went out and bought stock (on-line, of course) in Raytheon, which makes cruise missiles. I did do some research in news archives first, which turned up some articles suggesting that Raytheon was a solid company and attractively priced, but did no quantitative analysis of my own. Am I investing, speculating or gambling? Does your answer depend on whether I intend to flip it for a quick profit (I bought at 60, it’s been in the low 70’s recently) or hold it for a few years (which is my actual intent)?”

I would say in this case you were investing.

Indeed, I thought of doing the same thing.

Of course, whether or not it was a good investment would turn on such things as, mainly, whether your expectations of rising sales/earnings were borne out and whether the stock market had not already fully discounted these improvements. (So far, you seem to be doing fine.)

But you were investing. Raytheon is hardly a wild speculation. And neither, sadly, is the defense industry. (Wouldn’t it be nice if war and weaponry were this way-out concept that might conceivably find a market but were a long shot?) Raytheon isn’t an underfunded start-up. Raytheon isn’t teetering on the edge of bankruptcy.

Nor were you buying some out-of-the-money options on Raytheon in advance of the bombing, speculating that the bombing would indeed begin (as it did) and that this would drive up the stock. In hindsight, that could have been a neat and successful speculation.

(Nor were you shorting Lockheed, knowing it’s not as well managed as Raytheon. Shorting a stock can be a smart speculation . . . buying Raytheon and shorting Lockheed might have been an interesting “hedge” . . . but shorting a stock is speculation, not investing.)

No, you were investing in the long-term success of a well-managed established company. You were not leveraging your risk with margin. You were not adding to your risk by imposing an expiration date on the transaction. (With an option, the stock not only has to go up, it has to go up before the option expires. An option is a bet, not an investment. You don’t own part of an enterprise, you’re merely betting on the direction of its stock price.)

With a long-term holding in Raytheon, you will even pocket some dividends. (Before they got so tiny in relation to stock prices, dividends used to be a very large part of the point of investing. And one day will be again.)

To repeat: there’s nothing wrong with speculating, if you can bear the risk and know what you’re doing. And there’s not even much wrong with gambling, if you recognize that it’s an expensive form of entertainment that can be addictive and wreck lives. But “playing the market” the way many Internet traders are playing it these days is, make no mistake, gambling. It can be addictive and will wreck some lives.

Faithful reader Anne Speck puts it this way: “Gambling is ultimately a zero-sum game. If I win, the house loses. Investing, on the other hand, is more like gardening. I take resources and set them aside. They grow and become more valuable. Then when I sell (or harvest) them, it’s a win-win thing. I get the value of the growth, and the buyer gets something healthy that — hopefully — will continue to grow for him (or her).”

I couldn’t have said it better.

The overall theme of last week’s discussion was investing vs. speculating vs. gambling. But one of you — Dan H. — got me sidetracked (it is so easy to do that! I will be headed in one direction and then a bird flies past my window and I start thinking about birds, and the poor birds that can’t fly — ostriches! — and that gets me going on low-fat red meat [ostrich burgers have even less fat than turkey burgers] and before you know it . . . ) with the message heading “You can gamble and WIN.”

So I dutifully printed Dan’s contribution (it seems that at video poker you really CAN gamble and win), and then just as dutifully made fun of it. In the long run, I explained, even if you went to all the trouble to learn the system and fly to Las Vegas or someplace to test your skill, you’d likely make just $2 an hour before expenses. “And that’s not gambling, that’s work,” I concluded.

“Another drawback to that video poker scenario,” writes Fred Barotz: “If a 0.5% advantage [over the house] translates to $2 per hour profit, then one would have to bet $400 per hour on a quarter machine to achieve this, correct? So, even if the machine takes a maximum of, say, five coins per hand, you would need to play 320 hands per hour to bet $400. This is about one hand every 11-12 seconds. So, it seems you not only have to be perfect, but lightning fast as well. (Sounds a bit like my day job.)”

Well, hang on. It’s crow-eating time. (How much fat in crow, I wonder?) Or at least partially so.

Dan H. again: “Gary Catlin wrote the video poker tutor program which calculates the optimal play and odds. There are others, but his company, Panamint (pan-a-mint), is the only one whose base program version can be downloaded on line for free (www.vid-poker.com/vptutor.html). If you want the full-featured one that allows you to configure and calculate odds for different video poker machines, then you have to pay $25.

“I’ve met Gary, and he has a great story about finding a progressive video slot in Vegas with a 2% advantage over the house, but it was a $25!! machine. You could play up to three “coins” per play, so the actual bet was $75 per play. Good video poker players play at up to 500 hands per hour. That’s betting more than $35,000 per hour in hopes of statistically making (over the long run — at least hundreds of hours of play) $700/hour. Gary and a friend of his who is CEO of a moderate-size software company played for more than 10 hours, at the end of which they were a few hundred dollars ahead.”

And exhausted, one would think. But if even Gary could come out only a few hundred dollars ahead on this ideal machine after 10 hours, it sounds as if you or I would never come anywhere close to $700 an hour. Even he might have been earning barely fifty bucks an hour.

“Counterintuitively,” Dan continues, “the odds can be better on quarter machines than on dollar machines because casinos figure that nobody bright enough to do it is willing to go to all this effort to play optimally for $6 an hour. For a dollar machine, that’s more like $25/hour, which can be a decent living for people so inclined. Consequently, they make the odds worse for those machines. The $25 machine was an anomaly which the casino doubtless figured nobody would ever play the way that Gary and his CEO buddy did.

“The casinos are well aware of the situation, but so far it hasn’t taken enough of a slice out of them to care. What’s more, they make up for it by people who think they are playing optimally but really aren’t. (A few moderate mistakes will really kill your return.)”

The thing that has always impressed me about easy money is how very hard people will work in hope of getting it. Look at Humphrey Bogart in Treasure of the Sierra Madre. Or look at all the hours the alchemists put in back in the Dark Ages. (A boring, colorless account of this stretches for 158 pages in the classic Extraordinary Popular Delusions and the Madness of Crowds. But the first 100-or-so pages of that 1841 classic are more or less required reading, and I will be posting them here on this web site one of these days if you — who have already waited 158 years — care to wait a little longer.)

Anyway, through the marvels of Internetry, it was not long before I heard from Gary Catlin himself:

“Your discussion has come to my attention. Your correspondent Dan H. overstates the difficulty of learning to play near-perfect video poker, and also fails to mention some additional benefits. One is that many casinos have a small ‘cash-back’ program that can add up to 0.5% to your total return. [Dan actually hadn’t failed to mention it; I had edited it out for space. Mea culpa.] Another is that casinos provide ‘comps’ which are free rooms, meals, shows and merchandise based on the amount of play. Plus many players can play more quickly and at a higher coin level (i.e. dollars instead of quarters) than mentioned. The result can be a potential average ‘hourly rate’ in excess of the $2 mentioned.

“I was playing video poker in Las Vegas last fall, and started chatting with a fellow sitting next to me. I did not mention who I was, but he began to tell me all about my own software. It turns out he spent many months practicing and perfecting his play. Then, he and a partner drove out from Cleveland with a plan to spend six months in Las Vegas, playing video poker full time. The goal was to test the theory and see if they could make enough to support themselves free of their regular, oppressive jobs. I finally introduced myself, and elicited a promise from the gentleman to contact me at the end of the six month experiment. Well, I heard from him recently, and learned that he returned briefly to Cleveland to pack up his things — the move to Vegas and the new ‘career’ were to become permanent.

“This is not an isolated story. There is a small community of ‘professional’ video poker players in Las Vegas. And there are many thousands of recreational players (like myself) who have more conventional means of support, but enjoy coming to Vegas, staying in free rooms, eating free food, enjoying the shows and sights, and getting a chance to gamble at a game we expect to show a profit on. I should stress the profit is only likely to be shown in cumulative lifetime play, and that serious bankroll fluctuations must be expected on any given trip.”

Well, fair enough. The thought of bright, talented people wasting their productive lives this way — Profession? “Video poker player” — depresses me. But Gary sounds like a decent, sensible fellow. And as a computer-Scrabble addict (and not even paid for the pleasure), who am I to throw stones?

Tomorrow: Back to gambling in the stock market, which is where all this began before that bird flew past my window. (Just 2 grams of fat per patty, versus 16 for a hamburger!)

Turns out, you can win a lot more from Video Poker than $2 an hour (see last week’s discussion). But before returning to that tomorrow — and the issue of investing vs. gambling generally — let me slip this one in:

“When I was ordained,” writes a friend, “I was given $3,000 which I put into a savings account. Having it there keeps me from having to pay service charges on my Chase checking account. I don’t write many checks. Possibly three per month. Do you suggest a better place for my pittance?”

Well, if the monthly service charge you save is $10, which is probably about what it is, then you are “earning” $120 a year on $3,000 — 4%, tax free, which isn’t bad. If you could do twice as well (which you could not without taking at least some risk), that’s still only $2.30 a week more, and I guess there’s a limit to how much time and effort you should put in trying to find a way to get an extra $2.30 a week.

You might check with Chase to see if you can move your $3,000 into a money-market checking account that pays interest and would still serve to waive the checking service charge. Those accounts limit you to writing three checks a month. But for you, that might not be a problem. You’d be earning around 2% in taxable interest — wheeeee! (a second pittance!) — at the same time as you continued to “earn” 4% tax-free in saved fees.

If I were you, I’d just sit tight. You won’t get rich, but you’re not allowed to anyway.

Tomorrow: Back to the Vices.

[Note for those of you getting daily delivery via Q-Page . . . I posted this column late, which is why you may have been e-mailed Friday’s again. But soon Q-Page will get smarter about that, or I will have to become more punctual.]

For your weekend delectation, I’ve turned on Chapter 12. (You already have Chapters 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 and 11.) You think you’re a health nut. Get a load of Charles Revson.

But now back to on-line gambling. (See the discussion from yesterday and the day before.) If you’re looking for some reasons to keep your money in the stock market at today’s high levels, read on.

From Thad Fenton: “Your column today really hits the mark. The convergence of on-line trading and dot-com stock frenzy provides all the ingredients for a bubble run-up and crash. I can’t help but believe that this is history repeating itself in America — the Roaring ’20s and now Bull Market ’90’s. While in the ’20s everyone was living off the margin, it seems today everyone is living off their (often unexercised) tech stock options.

“Your analogy to gambling is apt. Will those who played the game and made money have the discipline to take their money off the table while they’re ahead of the ‘house,’ or will they stay in the game only to have the croupier suddenly rake away their chips? As you, I fear that greed has overcome reason in the market even for the “everyman,” and when the bubble bursts everyone will point their fingers at someone else and demand new regulation or file face-saving lawsuits, and few will look in the mirror for the real party responsible for the market mayhem.

“It’s hard to keep a cache of cash in these markets, but I’m confident that I’ll soon have a chance to buy back in at seemingly rock-bottom prices and then ride the market back over the long haul. Guess that’s why an asset allocation strategy does so well over the long term — the discipline of the allocation forces you to take some chips off the table when you’re winning, and leaves some chips to throw in when you know that the marble will have to land on black after a long streak of landing on reds only. But asset allocation isn’t sexy, doesn’t make one look particularly brilliant or prescient, and doesn’t generate prodigious short term fees for money managers, so I guess the popular press and talking heads won’t tout the theory and practice as they should RIGHT NOW. What a shame.”

Nicely put.

The other side of this, though, is the case against market timing. Basically, because almost no one can successfully call the direction of the market — a great many smart people have been skeptical of the US market for the last several thousand Dow Jones points — there is a case to be made for remaining fully invested forever, even in tax-sheltered accounts that allow you to take some chips off the table without tax penalty.

I buy that never-time-the-market line a lot less at 10,500 on the Dow (let alone the S&P 500, which has appreciated even faster) than I did a few years ago at, say, 5,000.

Still, there is a strong argument to be made for this. Also for the case that things ARE different this time (arguably the five most dangerous words in investing). Human nature never changes, so in that sense it’s hard to imagine there will never be another panic, another bear market, another prolonged period when the average person truly loathes the stock market and knows it is a terrible place for your money. But you can argue that we are in the midst of a long-term ramp up in positive factors that really do justify today’s prices, or close to them, and allow for much higher ones ahead. (Again, I’m too old to buy this argument fully — Gillette at 44 times earnings? — but I can make it.) You have the astonishing productivity-enhancing leaps in technology combined with the greatly reduced drain of military expenditures (military spending as a percentage of gross global product has to be near an all time low) and the trend toward far more efficient, productive market economies in places like China and Russia (yes, even in its current miserable state) and Eastern Europe. This is very big stuff. Add to it good relations amongst central bankers and a growing appreciation of the need for sound policies, and you could make the case that we are getting a bit smarter in the art of collective economy, as a species, even if human nature itself isn’t changing.

So there’s a rosy picture to be painted for sure, and, in any event, even in the U.S. market there are interesting values and special situations here and there.

So you can make the case for someone’s remaining fully invested in the stock market with that portion of his or her money that is truly “long-term,” whether I buy it fully at these valuations or not.

What you can’t make the case for, other than as you might make the case for other self-destructive behavior (“Newport — Alive With Pleasure!”), is the on-line casino. Active trading on the Internet, as practiced by most of the folks practicing it, is just gambling. Many players will ultimately lose money; and the vast majority, even if they make some, will make far less, after tax, than they would have with a prudent long-term buy-and-hold strategy.

Yesterday, I likened on-line trading to gambling. As usual, your responses were much more interesting than my column.

YOU CAN GAMBLE AND WIN

From Dan Hachigian: “Bet you didn’t know that there’s a game in Vegas that can be beat! (Now you’re waiting for me to also claim perpetual motion exists) I speak not of counting cards at blackjack, which the casinos have made next to impossible (and lures suckers in a vain attempt to try). I am talking about (some) video poker machines (primarily located off the strip), which offer up to around a 1.5% advantage over the house. Consider that 5 cards are dealt and for each card you make a decision about whether to keep or dispose of the dealt card. Therefore there are 32 different hands that can be potentially selected by a player. One of these hands has the highest expected statistical return. If you always pick this hand, a quarter machine will yield on average more than 6 dollars per hour of play (over the very very long run).

“Of course the average player gives the house more than a 10% advantage based on non-optimal play. It is, however, amazing that profitable machines do exist (and are easy to find). The only catch is that you have to learn to play very close to perfectly. Fortunately there is software to teach you to do just that (available for free, see www.vid-poker.com/vptutor.html). In reality, playing at the level where you get a 1.5% advantage over the house is fairly difficult, but achieving a .5% advantage is very doable. Really!”

If perfect play yields a 1.5% edge and $6 an hour, then the more easily achievable 0.5% advantage he posits is worth $2 an hour. So it would seem there is a second catch, with which I’m sure Dan would agree: this isn’t gambling — you know the outcome in advance, and there is no chance to win big — this is work. Well below minimum wage and with significant unreimbursed commuting costs, to boot.

Still, it makes the point that if you are really logical, you wind up winning at the expense of most day-traders — oops, I meant video-poker players — who stare at the screen and place their bets based on intuition and sorcery.

More on-line trading casino notes (and another chapter of Fire and Ice) tomorrow.

“We already know what a big winner the government is when it comes to the lottery,” writes Graig Ponthier. “If someone wins $30 million, the government gets almost half. That’s almost $15 million to the government and they didn’t even buy a ticket.”

But Graig was writing in with a further observation — something he noticed at the checkout line at one of the largest grocery chains in Texas.

“In Texas,” he explains, “you have to be 18 to buy tobacco. This grocery store had all its tobacco items locked up in a glass cabinet. If you want to buy tobacco, the checker has to get the key from the Manager and unlock it to get your product.

“Well, it is also a law in Texas that you have to be 18 to play the lottery. The difference is that these ‘scratch-off’ lottery tickets are conveniently located in vending machines for any patron to purchase, right next to the Soda machines and even a baseball card vending machine. There is no age verification system built in to the machine. Anyway, I thought this was interesting, only the government could get away with that!!!”

We are becoming a nation of addicted gamblers, and lottery vending machines between the Pepsi and the baseball cards can’t be helping.

Neither can the huge expansion of legalized gambling. Remember when Las Vegas was the only game in town? Or should I say the only town in gaming? OK, and Tahoe. But when Atlantic City got casinos, it was a huge deal. Now everybody’s got them. Or we seem headed that way.

But today’s explosion in gambling has nothing to do with casino. Or race tracks or ballgames, for that matter. Even with a bookie you used to have to make a phone call, and then physically, face-to-face, settle up. (Well, I’ve never actually placed a bet with a bookie. Maybe some of them pay off with checks?) Until recently, you couldn’t actually place a slot machine in your den. Or, well, maybe you could (I had a Black Knight pinball machine for a long time — “THE . . . BLACK . . . KNIGHT . . . WILL . . . PLAY . . . YOU”) and I actually still do have a 1937 nickel one-armed bandit. But what kind of gambling is that? It’s your own nickels! Maybe, if you’re lucky, you get a couple of your dumbest children to play the slot machine with their spare change on the way home from school. Or even the occasional dinner guest. A nickel here, three nickels there. But this is not gambling.

No, effort-free in-home gambling arrived just a short while ago, and it is called, needless to say, Online Trading.

Click . . .

Click . . .

Click . . .

With a one-armed bandit you need to be able to reach your entire arm up a foot or two, grasp the handle firmly with your fist, and yank. With Ameritrade or E-Trade or any of the others it is just the slightest indentation of your index finger. Click . . . click . . . click.

Most of us haven’t gotten addicted to this and probably won’t — even with the much clamored-for advent of night-time trading. But an alarming number of people have and will.

Investing is a terrific habit everyone should acquire. We would all be better off, individually and as a group, if everyone did. Speculating also serves a useful economic function, but is best left to a relative few — sophisticated, disciplined players who understand the odds and can afford the risk. (The odds, because of the tax system and the transaction costs, are generally against you.) What an awful lot of people have developed a taste for is neither investing nor sophisticated speculation but gambling. This should be no surprise. We are a nation of gamblers. Indeed, a species of gamblers. The difference is that now the betting window is right there at our fingertips. The wait until “post time,” what with the seeming inevitability of “24/7” trading, will soon shrink to nothing.

We will survive this, of course. But it may not be pretty.

Susan Kazmaier: “I am writing regarding a problem I had fairly recently with Ameritrade. I sold shares of TSATA on April 22nd, the day this stock was downgraded from the Nasdaq to the OTC bulletin board (although I wasn’t aware it was happening that day). I sold the shares over the internet trading system, and the order screen displayed 2 7/32 as the bid, ask. This happened to be the previous day’s close, but I thought that was a coincidence. It turns out that it wasn’t a coincidence, the internet wasn’t showing me the correct price, which was actually 1 3/8! (Fortunately, still more than I paid for it — but I would not have sold it at this price.) I have corresponded with Ameritrade, and one of their lawyers basically told me that my account is a self-managed account and quoted me the ‘Data Not Guaranteed’ terms and conditions. Ameritrade has not explained why I was not shown the correct price, nor why I was even able to trade an OTC BB stock over the internet. Their normal policy is that bulletin board stocks can only be traded through a representative. This experience has been disturbing, and I am almost certain to transfer my account out of Ameritrade. It also speaks of the risks of trading over the internet.”

Sorry you had this problem, Susan. I also use Ameritrade … but I take very seriously all their little warnings about “delays” and such. And I almost always use “limit” orders — I would with any broker — which prevent this sort of thing from happening.

Unless I’m missing something here, I don’t think you have a claim. Still, it’s a bummer — and perhaps yet one more reason not to try to outperform the pros, almost all of whom can’t outperform the averages over the long run, either. (Though it’s fun.)

Coincidentally, I have dabbled in TSATA, as well. The story, if I remember it right, is that John Malone paid $8, and John Malone is not the kind of guy to lose money. I bought some at $1.75 and then more at 75 cents. Then something happened and the stock suddenly jumped to nearly $5 (where I sold the shares I’d paid $1.75 for) and fell back almost immediately into the $2+ range, where it is today. So I’m very nicely ahead of the game with TSATA, and hoping for more.

This may sound like easy money, but bear in mind that when you trade in and out this way, your partner Uncle Sam takes a big chunk of any profit. And bear in mind, too, that it doesn’t always work. (To say the least.) To take just one fairly recent example: Ron Perelman, also not the kind of guy to lose money, had both money and ego tied up in Marvel Comics — and it crumbled to dust.

If I get lucky, my wonderful TSATA profit may one day equal my Marvelous loss.

So, yes, I have my vices, too.

The time you would have spent reading this column today? Click here and save some money instead.

Recently, I called “that new car smell” the most expensive fragrance in the world. Thanks to Stephen Gilbert for pointing Susan Sprechter’s excellent letter, posted on “the car guys‘” excellent web site. (You know the car guys? Tom and Ray? One more reason to listen to National Public Radio — or visit its excellent web site. On NPR, excellence abounds.)

To wit:

“This week a friend showed us her new Malibu, and as I smelled that seductive ‘new car’ aroma I felt myself strangely compelled to go out and purchase a brand-new automobile, too. Later in the week I was putting up a recently purchased plastic shower curtain and noticed that it had exactly the same satisfying odor as a new car with a three-year warranty. May I suggest that people save themselves from a very expensive form of chemical dependency by carrying a little piece of new shower curtain in their pockets? Just one sniff at the first urge to visit a dealership, and the fit passes. You are once again cool, calm and breathing normally.”

The alternative, I should think, would be to fit your car seats periodically with shower-curtain seat covers. Is Rayco still in business? When I was five, my dad had the Rayco Seatcover advertising account and put me in one of their commercials, jumping up and down on the seatcovers, presumably to demonstrate their protective qualities. (I was five, what did I know?) Thus began and ended my acting career.

I believe you can also buy that aroma in a spray can as well. I don’t know the official name of the scent, but I call it eau de saved money.